OPEC+ Extends Cuts and Plans for Production Increases

OPEC+ Extends Cuts and Plans for Production Increases

Primer: Since late-2022, OPEC+ members have put in place policy to cut output by 5.86 million/bpd, or almost 6% of global demand. All current cuts are active to date, with 2.2 million barrels per day (bpd) originally set to expire at the end of June 2024 and the remaining 3.66 million/bpd cuts initially in place until the end of 2024.

• On Sunday, the group set out the following plan:
  • OPEC+ members who pledged voluntary cuts amounting to 2.2 million barrels per day (bpd) in November 2023 have agreed to extend cuts until the end of Q3-2024. Beginning in October 2024, these cuts will be gradually unwound, on a monthly basis, until the end of September 2025. These future production increases are subject to market conditions and can be paused or reversed.
  • OPEC+ agreed to extend the cuts of 3.66 million/bpd by one year until the end of 2025. These cuts were initially implemented in late-2022/early-2023 and are a blend of group-wide and voluntary cuts.
• Group-wide baseline revisions for 2025, initially supposed to be announced at this meeting, have been pushed back to next November, whereby 2026 targets will be set.
  
  • Only the UAE received an upward adjustment of 300k/bpd to its baseline which is now 3.5 million/bpd. OPEC+ agreed that it would use independently assessed capacity figures to determine 2026 targets for the remaining members.

Key Implications

• Sunday's meeting brought forward another complex deal that tried to achieve two competing objectives. Firstly, OPEC+ continues to reassure markets that they will support oil prices by rolling deep production cuts into the quarter and year ahead (bullish for prices). At the same time, they laid out a framework to gradually bring production online through 2025 (bearish for prices). 
• Key in re-upping production plans is that they are "subject to market conditions". The group has given themselves optionality around their production increases and so the question becomes what OPEC+/Saudi Arabia deem to be a strong enough market for easing cuts. Recall, of all major oil watching agencies, OPEC+ carries the most bullish 2024 and 2025 demand estimates.
• Unlike past OPEC+ meetings, the deal structure and communication between group members this time around has been more clear, allaying fears of faltering OPEC cohesion. 
• Market reaction was initially muted with WTI prices roughly unchanged overnight. At the time of writing, WTI is down around 2% to $75.50/bbl.
• Our $80/bbl forecast for 2024 WTI prices remains intact. The decision to increase production in the fourth quarter was part of our base-case scenario and consistent with when we believe OPEC will have evidence of generally tight physical markets. Near-term prices should receive a lift from current levels on continued OPEC+ restraint. We see global oil markets being slightly undersupplied for the remainder of the year before coming back into balance in 2025.
• We do acknowledge the downside risk from a highly uncertain demand environment and the potential for competing supply from non-OPEC producers. However, taking stock of the balance of risks, oil markets appear to coalesce around the $80/bbl level.
• Against the backdrop of continued OPEC+ production restraint, Canada still has the potential be one of the largest sources of incremental global supply growth in 2024. We expect Canadian oil output to grow by 300–500k/bpd, edging out the U.S., whose 2024 oil production growth is forecast at 300k/bpd.

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